Stock Market Basics
Bank equity returns are more sensitive to systematic risk near cyclical troughs
than they are near the top of the cycle. More specifically, the first column in
Table 1 shows the estimates of the interaction terms between the variable
depicting the cyclical phases and the three pricing factors. Negative
coefficients indicate that bank stocks are more sensitive to the market and size
factors in economic downturns. The result is most pronounced in the case of
the size factor. The loading on size increases by 15 basis points when GDP
growth deteriorates by moving down one quartile.
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